London-based online education provider Wey Education (LON:WEY) shares tanked a further 20% today as it issued a trading update advising investors that not only revenues are down, but losses have widened. The share price in truth, had not really much left to go, and the damage had already been done:
As you may see from the graph, the share price has been absolutely decimated over the last year and the current market cap at the present time stands at a shade over £8m. A theoretical floor for the share price may be around half this, because the cash at bank is over £4m and (as of last year anyway) the businesses were only marginally loss making.
The reasons for this dive are fairly simple, the markets were duped by a growth story: it seemed a good bet that Wey’s online education courses may have gotten some good traction worldwide, especially in continents such as Africa and China giving them a vast target market. Through a variety of reasons, the belief that the company could execute this seems to have died, basically confirmed by the RNS today. Far from a huge premium that the shares did command a year ago, the market is effectively valuing the remaining businesses at negligible values.
Wey Education is certainly an interesting proposition. It operates in the educational field, specialising in courses delivered online. The advance of technology has made it possible to deliver these types of course in a more immersive and attractive way than ever before, for example the ability to deliver in real time (as opposed to pre-recordings).
The initial plans were certainly ambitious, aiming to set up joint ventures overseas, recruit teachers and produce content. There is a certain sense of doing this, in that in this field there can be significant first mover advantages. There was good investor appetite, and as such several placings were able to raise the money to facilitate this. With sufficient scale, I am sure the aim was to become a bona-fide, recognised international supplier of education services.
The warning comes in a rather rambling RNS released at 12.30pm today. It seems the gist of it is that the previous strategic direction is to be abandoned:
Wey Education has been expansive over the last few years, developing a range of brands and services to be delivered in overseas territories, particularly Africa and China. Much of the work in these locations was undertaken by Wey’s previous Chairman and Chief Executive Officer, David Massie personally, relying on his experience and contacts in the relevant regions. Since David’s recent sad passing, the Board has carefully reviewed the Group’s strategy in the light of the new circumstances it now finds itself in and concluded that a more focused approach is in the best interests of stakeholders.
This sounds very much like passing the blame onto someone who isn’t around to defend himself, I would have thought the demand for education has remained the same. One of the reasons is that perhaps the cost of that ambition was a step too far:
The market for online education is clear to the Directors and it is evident that we can be ambitious in growing the business in the two areas in which we have established business, relationships and which are, before the addition of the public company overhead, profitable.
The joint ventures seem to have been canned:
In respect of overseas operations, the Group, (which has always had a level of international business) has decided to simplify its offering and to clarify the relationships it has with third parties. Unless compelling reasons dictate in future, the Group intends to deal with overseas partners as a sales channel, rather than pursue further opportunities for joint ventures and more complex arrangements.
And there was bad news for the figures, as the costs of closing these seem to bite:
Following this strategic review, Group turnover for the year to 31 August 2019 is expected to be substantially below current market expectations. Turnover is, however, expected to be in excess of £5m, representing an increase of over 24% on the year ended 31 August 2018.
An increase of 24% sounds great but is in reality a massive slowing of the growth rates we have seen previously. And it seems that the decision has been made to take all the costs now:
Expectations are that the Group’s loss before tax for the year will be somewhat greater than in 2018 due to the factors described above. The costs of the overseas and business expansion ventures will therefore not impact future years, leading to expectations of profitability on an ongoing basis from the financial year to 31 August 2020. The Group is extremely well funded, having in excess of £4m cash at bank as at 31 January 2019 and is expected to be cash generative from ongoing activities.
A brief outline of the business was already given. The last annual report shows a company in a rapid state of growth, with revenues increasing year on year to £4.2m. There are several arms to the business: Interhigh, Wey Academy, Academy21, Infinity Education, and Quoralexis. They all share the commonality of that lessons are delivered online, but they seek to deliver a different range of courses – GCSEs, A-Levels, vocational courses and EFL (English as a Foreign Language).
Helpfully, we can see the geographical split: the average client is still in the UK (perhaps those seeking additional qualifications). I would guess that the rest may be from children of ex-pats who want them to have British rather than local qualifications.
The company uses Adjusted EBITDA as their performance measure and on this, they are profitable (£452,569 in 2018, £172,419 in 2017). But the financial statements carry a line:
For a firm seeking to grow in their market, it is hard to see that marketing could be a one-off, and no doubt they would have to continue this every year. The same also goes for development: delivery of online education is likely to be an evolving field as competition is likely to intensify. Almost £700k of software development costs have been capitalised and just over half has been amortised.
This being said, the balance sheet is very solid. There is a large cash balance in excess of £4m, although this was built up due to a share issue last year. Both debtors and creditors have jumped rapidly, although this is to be expected with a similar rapid rise in turnover. A quick check on the cash flow statement shows that there is a slight cash drain: 2018 shows a loss of £230k due to the exceptional costs, and the year before that, there was a profit of £17k but only due to an exceptional income item of £153k.
But looking at the cash flow statement, the burn rate of cash seems quite slow, and the current situation is solid. It certainly is not a company in distress, and as it pointed out in the RNS, it is continuing to make acquisitions.
Forgetting the timing of the RNS, Wey is quite an interesting business. It perhaps has bitten off more than it could chew, as although they could take on new partners in joint ventures, the bulk of the hard work would still have to be done by them in terms of producing the final product. But it is hard to deny that there is no market for it. Online education in the form of courses should continue to flourish, and for the right firms, the operational leverage could be large as content could be sold, repackaged and sold again.
There are a fair few concerns surrounding this and perhaps this is where the market feels nervous. Customer churn will be high – someone sitting A-Levels is unlikely to do them again – and such marketing needs to be constant. Another thing is that there are literally dozens of places to take these qualifications, although few at the moment offer the ‘virtual classroom’ experience. Competition is therefore likely to keep a lid on prices unless a product is truly innovative and has barriers to entry.
Another worry is the provision of cut-price courses from elsewhere. Sites such as Udemy and even Youtube have plenty of people sharing their knowledge for barely anything, even free in some cases, although arguably people that use these resources are not likely to be Wey customers.
Against this, Wey are extremely cheap at present, with cash approaching half their market cap, and a current business which is not a huge drain on it, so that gives them time. The questions will be, how will their acquisitions fare, and what will be the result of the new strategy which refocuses on the core markets? I feel this could go either way: a slow death or if there is a meaningful recovery, some kind of consolidation within the UK sector. I’d go 3/5 but I sense the latter may be slightly more likely.